The post-pandemic rally, fueled by easy money and fiscal stimulus, has come to a screeching halt in 2022. In fact, this has been the worst start for stocks (S&P 500) since 1939! Bonds have not been a place for safety during this volatile period for stocks, which has been somewhat of an interesting development over this time-period. The best place to have your money to start the year has been in oil and gas related equities and in the underlying commodity. Below, we are highlighting the data to support these points.
Broad Market Returns
For broad markets, the returns have been abysmal through the first 4 months of the year. While bonds have had better returns relative to the S&P 500, they have still posted returns just shy of -10% on the year. Inflation concerns have trumped slowing growth, which was confirmed by the negative Q1 2022 number at (-1.4%) on an annualized quarterly basis. That being said, there are signs that inflation is moderating, and we will see slowing inflation growth, or dis-inflation, going into the back half of the year.
US Sector Returns
From a sector standpoint, clearly energy has been the biggest beneficiary of the inflationary pressures we’ve seen for the past 18 months. Consumer defensive (staples) have been a great place to have money relative to the S&P 500, outperforming by nearly 1,400 bps. Utilities as well. Consumer cyclicals (discretionary) and communications have been absolutely pummeled, with technology stocks not too far behind.
Disappointing earnings from the FAANG names (Facebook/Meta, Amazon, Apple, Netflix and Alphabet/Google), which were the darlings of the pandemic, and were once thought as the untouchables of the market, have come back to earth as their earnings and revenues have started to come back to earth. Even the great Cathie Wood has seen her fund lose nearly -60% of its value over the past year!
Her top holdings include the frothiest of the frothy with Tesla at a roughly 10% position, Zoom Video at nearly 8%, Roku at 7% and Coinbase and Square (now Block) at 6% each. For reference, a 60/40 portfolio of ARKK and the Barclays US Aggregate Bond, the most widely used benchmark for bonds, would have returned -33.9% year-to-date!
Significant evidence regarding peak inflation is starting to show in economic data we see and we think that we are in the early stages of the traverse down the backside of the sine curve on inflation growth. What this means is that while the price levels will stay elevated, the rate at which they go up will be slowing. Could outright deflation be in the future once supply chains are restored and the constant reminder of COVID is behind us? Possibly. Regardless, the Federal Reserve is fixated on the notion of inflation, and as true as the sun rising in the east, they are behind the curve on raising rates again. The Jerome Powell and the Federal Reserve Open Markets Committee unanimously agreed to raise the overnight lending rate by 0.50% to a target 0.75% - 1.00%. While he indicated in his press conference that they were not anticipating a 0.75% increase in the overnight lending rate at the next meeting in June, he did project that they would seriously consider another 0.50% hike in June and again in July. If the Fed raises rates 50 basis points in May and then another 50 basis points in June, we would expect markets to trade at much lower levels than where they currently are, after the route we’ve seen to start the year. Going back to the all-time highs in November 2021, the NASDAQ 100 is down -21%.
Portfolio Positioning
For accounts we manage, our positioning remains unchanged. We have added in long-dated treasuries, gold and gold miners as hedges against slowing growth and disinflationary pressures. Long-dated treasuries have not proven as effective hedges thus far, but gold and gold miners have helped to buoy performance. On the equity side, we have allocated to staples, healthcare and utilities, as well as to a defensive manager in James Abate of Centre American Select (DHANX), who is up more than 7% year-to-date in a market that is down -13%!
As always, please feel free to reach out to us with any questions or comments.
Glenn Moore, Gordon Asset Management, LLC Investment Policy Committee
Disclosures:
Gordon Asset Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
Gordon Asset Management, LLC may discuss and display, charts, graphs, formulas and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested.